RECEIVERSHIP APublicationofthe CaliforniaReceiversForum …receiver 1 seeks court confirmation of a...

Fall 2010 • Issue 38

A Publication of the

California Receivers Forum

RECEIVERSHIP

I n s i d e

9Using A Limited

Purpose Receivership

To Collect Hotel

Transient Occupancy

Taxes

17REFRESHER/OVERVIEW

An Introduction To

Receiverships

18 Ask The Receiver

21 The List

22Don’t Let Fraud

Destroy Your

Business: Use

Internal Safeguards

to Stymie Crime

24

How the Securities

and Exchange

Commission Battles

the Progeny of

Charles Ponzi – Using

Receivers as an

Important Tool

Time is running out to register for the California Receivers Forum’smammoth three-day Loyola Symposium on the practical and legalaspects and uses of receiverships in today’s troubled financial climate.Thursday, January 20, features lectures by top practitioners onadministrative skills that must be mastered by every receiver and theirparalegals and case administrators. Friday, January 21, features nutsand bolts of governing laws for many types of receiverships being usedby the courts today. Saturday, January 22, offers two lecture tracks: onefostering expansion of existing receivership practices and the seconddigging deeply into complex receivership issues and multistate cases.

Continued on page 5...

In PariDelicto andthe BlameGame:ShouldReceiversGet Caughtin the Fray?

NEWS


BY: KATHY BAZOIAN PHELPS, ESQ.*

The finger pointing begins when a receiverof a Ponzi debtor sues the Ponzi debtor’s lawyersand auditors.

• First, the receiver claims that theauditors’ false financial statements andthe attorneys’ private placementmemorandum misled investors to invest.

• These defendants then claim that theinsiders of the debtor fraudulentlyprovided false information in the firstplace on which they relied.

• Next, the debtor corporation claims thatit is not responsible for the wrongfulconduct of its agents because they wereacting outside the scope of their duties.

RealPropertyReceiver’sSales:When TheSale OrderIs NotEnough

BY: MIA S. BLACKLER, ESQ.*

California Code of Civil ProcedureSection 568.5 is often cited as unrestrictedauthority when a rents, issues and profitsreceiver1 seeks court confirmation of a saleof real property in receivership, usually atthe request of the plaintiff / securedcreditor. Section 568.5 provides that,subject to court approval, a receiver maysell real or personal property in thereceiver’s possession. It is not a carteblanche endorsement for receiver’s sales,however, as the statute does not addresswhen it is proper for a receiver to attemptto sell such property, or when a courtshould approve such proposed sale.

FINAL DAYS TO REGISTER!

Networking SocialsMeet other receivers and service or productsuppliers at Loyola IV. Breakfast, breaks, lunchesand the end-of-day socials are good times for allparticipants to network. Saturday Track One andTrack Two schedules are synchronized, so nomatter which program you attend, you can socializewith everyone. On Friday there is an optionaldinner for all symposium participants and in pastyears this has been a fun evening and great time toget to know people from around the state. Pre-registration is required for the optional Friday dinneron a registration form or on-line.

Why You ShouldAttend The CRF

Loyola IV SymposiumThe California Receivers Forum is theprimary source of education for receivers, theiragents and counsel. This in-depth educationalprogram includes extensive substantivematerials of sample forms, pleadings and data.Those CRF members who complete thecourse receive a certificate of participationand may be eligible to have a specialacknowledgement of completion.

WHO CAN ATTEND: Any professionalinvolved in the various aspects of receivershipcases may attend the program. There are noacademic prerequisites.

Additional symposium information is available on www.receivers.org. or call ToniSpangler at 949-497-3673 x 200 or correspond with her at [email protected].

This symposium is also a unique opportunity for sponsors and vendors to reach theCalifornia receivership community. Sponsorship information is available from Kevin

Singer at 310-552-9064 or [email protected] Hours MCLE/CPE Credit available Thursday

8 Hours MCLE/CPE Credit available Friday and Saturday

• Fall 2010

Pick An Expert’s BrainFriday and Saturday luncheon tables will befacilitated by a seasoned receiver so you canask questions and have an extendedconversation about the table’s topic. Therewill be dozens of topics, so pick the tableand facilitator that interests you. It will bea lively 75-minute session to learn, networkand enjoy lunch. The table conversationsand networking replaces a traditionalluncheon speaker.

If you have a specific topic you’d likefeatured at a table, send your suggestion toMarty Goldberg, Luncheon Program Chair,at [email protected].

Loyola Symposium PricingThe Thursday Administrative track including theopening luncheon is $300 until January 14th or $ 350if registering January 15- 20. The Friday and Saturdayfull day programs are $450 per day until January 14th,then $500 January 15 - 22. There is $50 discount if youregister for any two days of Loyola. Registrations may betransferred between people within your company up toJanuary 1, 2011 at no charge. MasterCard and Visa areavailable, and we welcome checks as it saves CRF thecredit card service charge expense.

Register using the registration form inserted in this newsletter, or register on-line atwww.receivers.org. From the home page, click on “Register” under the Loyola IV logo.

NEWS FLASHDept. of Real Estate Continuing Education Credit Applied For

CRF has applied for the Loyola IV program to offer up to 14 credits in DRE continuing education credit in the areas of“Combined 8 Hour Survey Course,” “ Ethics,” “Consumer Service-Professional Competence” and “Risk Management” .This is the first time CRF has ever attempted to get DRE credit for a program. The application process is demanding andexacting and there is no guarantee that the Loyola IV Symposium program will be approved. All of the usual DRE courserequirements will be in place including an on-site, open book test and mandatory sign in and out.

If you are interested in attending the program ONLY IF it is DRE approved for credit:1. Fill out a paper form. Make a note at the top “if DRE Credit ONLY”.2. We will not process your registration until CRF has approval on the DRE credit.3. If the DRE credit is not approved, your check will be returned or nothing will be charged on your credit card.

DON’TMISSIT!MostComprehensiveReceivershipSymposiumEverPresented

RegisterOn-Linewww.receivers.org

Fall 2010 •

The more than 75 presenters will include CaliforniaSuperior Court judges, Federal District and Bankruptcy Courtjudges and California's top receivership professionals – lawyers,accountants, receivers and administrators. All CaliforniaReceivers Forum chapters – San Francisco, Sacramento, theCentral Valley, San Diego, Los Angeles and Orange County –will be represented on the panels.

This fourth symposium introduces a new format tobroaden prior symposia with new topics, differentiatedexperience level programming, greater opportunities fornetworking and structured small group discussion sessions.The Forum anticipates increased attendance by participantsfrom out-of-state, enhancing the discussion of howreceiverships function in other jurisdictions.

The symposium is certified for California MCLE/CPEcredit; participants will be able to earn up to 20 hours ofcredit over three days of intensive programs.

Education Schedule At-A-GlanceThursday January 20, 2011

Administrative/New Receiver Track Half-Day Program from11:30am–5:30pm, followed by the Speakers & Board of DirectorsDinner from 6:30–9:00pm.Panel topics include:• Receivership Overview • Types of Receiverships• Setting Up the Case • Real Estate Sales• Closing the Case • Banking, Accounting, Reports

and Insurance Issues

Friday January 21, 2011General Overview of Receivership Practice panels from 7:00am–5:15pm, followed by a cocktail reception at 5:15pm and galanetworking dinner for all attendees with special guest speaker from6:30–9:00pm. Panel topics include:• Legal Authority for Appointment of a Receiver• Overview / Types of Receiverships• Procedural Aspects (Bonds, Oath, Taking Charge, Tax ID,

Bank Accounts, etc.)• Engaging of Professionals• Locating Assets, Tax Accounting, Trust Taxes• Funding the Estate – Sale of Assets, Deficiencies, Final Reports

and Accounting• Receivers’ Neutrality, Rights and Risks• Compensation of Receiver & Professionals• Final Reports and Accounting

Saturday January 22, 2011Two-Track Panel Presentations on Intermediate & AdvancedTopics with concurrent breaks and a luncheon session.

Track One topics include:• Rents & Profits and Substandard Housing Receiverships• Completion & Sale of Housing Projects• Commercial Real Estate Properties; Equity Receiverships and

Liquidation• IRS Considerations• Orders of Appointment Issues

Track Two topics include:• Managing Business Receiverships and Turnarounds• Construction Development Projects, Mechanics Liens,

HOA Matters and Unique Insurance Issues• Sales in Receiverships• Receivership or Bankruptcy – Benefits and Detriments• Regulatory Receiverships, Fraud Discovery and Multi-state Cases

Loyola IV FacultyThe Loyola IV faculty is a diverse and distinguished group. The chairs,moderators, judges and panelists hail from around the state. There aremany new topics and new presenters at Loyola IV. The basics havebeen updated with new cases and trends and the more complex casesadded to the program as the types of receiverships and their complexityhas evolved through the past few years of financial stress.

THURSDAY FACULTYEdythe Bronston – Law Offices of Edythe L.BronstonMarc Brooks – Mara EscrowJames Donell – Jalmar Properties IncVictoria Doran – LECGPamela Hinojosa – Law Offices of Edythe L.BronstonKenton Johnson – Robb Evans & AssociatesLisa Kalaydjian – Pasternak, Pasternak &Patton ALCDominic LoBuglio – LoBuglio & SigmanThomas Seaman – Thomas Seaman CompanyPhil Seymour – The Seymour Group/ EliteProperties RealtyKirby Wells – Independent Solutions UnitedPeter Wessling – Tranzon Asset StrategiesLora Wong – Torrey Pines BankAndy Zimbaldi – Alden Management Group

FRIDAY FACULTYJudge Andrew P. Banks – Orange CountySuperior CourtJudge Sheila Fell – Orange County SuperiorCourtJudge Dan T. Oki – Los Angeles SuperiorCourtVictor Gold – Dean, Loyola Law SchoolAnne Wells – Professor, Loyola Law SchoolEverett Barry – Mulvaney, Kahn & Barry LLPEdythe Bronston – Law Offices of Edythe L.BronstonMike Essary – Calsur Management & RealtyJames Granby – Ferris & Britton APCNancy Hotchkiss – Trainor FairbrookDan Jones – PCG ConsultantsRichard Kipperman – Corporate ManagementIncDominic LoBuglio – LoBuglio & SigmanJames Lowe – Executive’s Edge LLCKelley McLaren – Trigild IncAlan Mirman – Mirman, Bubman &Nahmias LLPRichard Ormond – Buchalter Nemer PCLeon Owens – MARS IncGary Rudolph – Sullivan Hill Lewin Rez &EngelDamon Saltzburg – Saltzburg, Ray &Bergman LLPRichard Weissman – Saltzburg, Ray &Weissman LLPNorma Williams – Williams & Associates

SATURDAY INTERMEDIATE TRACK 1Judge Anthony J. Mohr – Los AngelesSuperior CourtMarjorie Burchett – Luce, Forward,Hamilton & Scripps LLPCraig Collins – Mosier & CoPeter Csato – Frandzel, Robins, Bloom &Csato L.C.Michael Fiorina – Total Companies

SATURDAY INTERMEDIATE TRACK 1Taylor Grant – California Real EstateReceiverships LLCLaura Lynton – ING Real Estate FinanceE. David Marks – Miller Starr RegaliaThomas Nolan – CW CapitalDavid Pasternak – Pasternak, Pasternak, &PattonBruce Poltrock – Frandzel, Robins, Bloom &Csato L.C.David Ray – Saltzburg Ray & WeissmanCharles Rosen – Law Offices of A. LavarTaylorMatt Seror – Buchalter Nemer PCKevin Singer – Receivership SpecialistsSteven Spector – Buchalter Nemer PCArthur Swicker – Swicker & AssociatesMichael Wachtell – Buchalter Nemer PCJoel Weinberg – Insolvency Services GroupGregg Williams – Trident Pacific Real EstateGroup Inc

SATURDAY ADVANCED TRACK 2Judge Gail A. Andler – Orange CountySuperior CourtJudge Peter H. Carroll – U.S. BankruptcyCourt, Central DistrictJudge David O. Carter – U.S. DistrictCourt, Central DistrictJudge Shelleyanne Chang – SaramentoSuperior CourtJudge Thomas C. Holman – U.S.Bankruptcy Court, Eastern DistrictAnne Wells – Professor, Loyola Law SchoolMia Blackler – Buchalter Nemer PCHannah Blumensteil – Winston Strawn LLPRuss Burbank – Burr, Pilger & Mayer LLPMark Cameron – Miller Starr RegaliaGary Caris – McKenna Long & AldridgePeter Davidson – Ervin Cohen & Jessup LLPStephen Donell – FedReceiverRobb Evans – Robb Evans & AssociatesDavid Gill – Danning, Gill, Diamond &Kollitz LLPJohn Jacobs – Federal Trade CommissionRichard Lapping – Winston Strawn LLPBeverly Mc Farland – The Beverly GroupJohn McCoy – Securities and ExchangeCommissionBenjamin McGrew – Managewest IncRobert Mosier – Mosier & CoTed Phelps – PCG ConsultantsKirk Rense – Law Office of Kirk RenseSteven Speier – American Spectrum RealtyManagement LLCDavid Wald – Wald Reality AdvisorsKirby Wells – Independent Solutions UnitedKevin Whelan – The Beverly GroupTodd Wohl – Braun Auctioneers

• Fall 2010

One of the key goals of the California Receivers Forum isproviding quality educational programs for its one thousandmembers throughout the State of California. In the past month,the Los Angeles/Orange County chapter hosted anexceptionally fine program on the A-Z of regulatoryreceiverships. The panel included John McCoy from the LosAngeles office of the Securities and Exchange Commission(please see the related article and photos in this issue). Similarprograms have taken place this year in San Diego, San Franciscoand Sacrament, to name a few.

The upcoming major event for the entire state will be LoyolaIV on January 20 to 22, 2011. This venerable program has beenexpanded to a 2.5 day seminar and features a new section on theadministration of receiverships – the inner workings of areceivership. This Loyola IV seminar will take place in severalrooms at the Los Angeles Convention Center. The main drawfor this state-wide conference is the faculty – which includessome of the State’s best receivers, lawyers, accountants andadministrators. There will be approximately a dozen judgesparticipating on the panels (both state and federal). It promisesto be an impressive educational seminar that new andexperienced receivers cannot afford to miss. If you haven’talready done so, you should sign up forthwith.

With the significant increase in requests for the appointmentof a receiver, a new goal for the CRF is to take the educationalmessage to the judicial community where some judges may behandling requests for appointment of receivers for the first time.Toward this end, three members of the California ReceiversForum have been invited to participate in the American Collegeof Business Court Judges annual educational session held atGeorge Mason University in Fairfax, Virginia. It may be thefirst time that a group of about 50 judges from around thecountry have devoted an exclusive two-hour period to reviewingreceivership issues. We hope to expand on this withinCalifornia in 2011.

Happy holidays.Bob Mosier

Receivership News

Published byCalifornia Receivers Forum

954 La Mirada St.Laguna Beach, CA 92651

949.497.3673 x 200www.Receivers.org

PublisherRobert P. Mosier

[email protected]

EditorKirk S. Rense, Editor

[email protected] Collins, CPA

Associate Editor

Associate PublishersKenton Johnson

Beverly McFarlandRon Oliner

Rob Warren, III

Contributing ColumnistsAlan Mirman

Heard in the HallsPeter DavidsonAsk the Receiver

OfficersRobert Mosier, Chair

James Lowe, Chair ElectNancy Hotchkiss, TreasurerGordon Dunfee, Secretary

Bruce Cornelius, Projects Director

Receivership News is publishedquarterly by the CaliforniaReceivers Forum, a not-for-profitassociation. Articles in thispublication express the opinionsof their authors and do notnecessarily reflect the views of thedirectors, officers or members of theCalifornia Receivers Forum.Articles are intended as a sourceof general information and shouldnot be construed as specific advicewithout further inquiry and/orconsultation with professionalcounsel.

© Copyright 2010California Receivers Forum

All rights reserved.

Publisher’s CommentsBY ROBERT MOSIER, PUBLISHER*

Robert P. Mosier

*Robert P. Mosier is aSouthern Californiatrustee and receiver andprincipal of Mosier &Company, Inc., a firmthat has specialized inmanaging and turningaround troubledcompanies for more than25 years.

Mr. Rense is a lawyerspecializing in insolvencyand in representing court-appointed fiduciaries,with more than 20 years'experience. Kirk is aCalifornia ReceiversForum, LA/OC ChapterBoard Member.

Kirk Rense, Esq.

Loyola Hotel InformationJW Marriott at LA LIVE is the official headquarters hotel for Loyola IV guest accommodations. Locatedconveniently across the street from the Convention Center, the new property is the perfect choice for out-of-town attendees and guests. Locals who want to attend the Friday Evening Dinner and avoid traffic areencouraged to stay downtown during the program. Book in the group block and save.

Special Deluxe Room Rate of $179 per night.Visit www.tinyurl.com/LoyolaHotel2011 to reserve your room.

Alternatively visit the hotel website at www.lalivemarriott.comEnter Group Code: crfcrfa

Contact CRF Administrator Toni at (949) 497- 3673x 200or [email protected] with any questions.

RESERVATION DEADLINE:DECEMBER 28, 2010BOOK EARLY TO SECURE REDUCED GROUP RATE.

Fall 2010 •

This section also contemplates that the receivershipproperty will be sold by way of a public auction pursuant toCode of Civil Procedure Section 701.510 et seq. These rulesare rather formalistic and time-consuming, however, andcourts regularly approve a sale that varies from therequirements of these statutory provisions. That a receivermay deviate from these public execution requirements issupported by People v. Riverside University, 35 Cal.App.3d572, 582-583 (1973) and Cal-American Income PropertyFund VII v. Brown Development Corp., 138 Cal.App.3d 268,274-75 (1982).

When the parties to a foreclosure suit stipulate to a sale ofreceivership real property, courts have freely expandedreceivers’ authority to encompass sales, provided that thereceiver’s appointment order contains language to permit asale. The situation becomes more clouded in the face ofopposition, however. Accordingly, when there is oppositionto a receiver’s sale, it is important that the receiver andsecured creditor consider the effect of the objection(s), andhow these objections can affect the viability of the sale even ifit is authorized by the court through a sale order.

Objections by Junior LienholdersA mechanic’s lien claimant or junior secured creditor may

formally object to the proposed receiver’s sale on the groundsthat the only way to remove their liens (in the absence of avoluntarily release) is for the mechanic’s liens to be bondedaround, or for the senior lienholder to complete a foreclosureproceeding, or that the liens be discharged in aborrower/debtor’s bankruptcy proceeding.

The junior lienholders are objecting to the proposed lienstripping based on a perceived lack of due process in theabsence of express statutory authority for lien strippingthrough receiver’s sales. They may further argue that thesejunior lienholders were granted certain property rights bycontract and by California law, which rights have value even iftheir only efficacy is as a roadblock to a quick sale as asubstitute for the senior lienholder’s foreclosure. Practicallyspeaking, however, the junior lienholders are looking for a wayto obtain payment on their liens that would otherwise beunavailable in a bankruptcy or foreclosure context.

In contrast, those in favor of lien stripping through areceiver’s sale (senior secured creditors) argue in favor of freealienability of real property trumping the legislative schemerequiring a senior secured creditor to complete its foreclosureon its lien in order to free property from other liens later intime and right, and in favor of preserving the value of the realproperty collateral which would otherwise deteriorate duringthe delay caused by a foreclosure or bankruptcy proceeding.This debate on lien stripping is as yet unresolved.

The closest analogous case is in bankruptcy courtconcerning Bankruptcy Code Section 363(f), making

Bankruptcy Court the only court with a statutory scheme thatspecifically allows sales free and clear of liens in certain,controlled circumstances. See, Clear Channel Outdoor, Inc.v. Knupfer, 391 Bank. Rptr. 25 (9th Cir. BAP 2007) and itsprogeny. Also of note is that Washington State has recentlyenacted a statute that expressly authorizes state courts to causeproperties to be sold free and clear of liens. (RCW Title 7“Special Proceedings and Actions” Sec. 7.60.260 “Receiver’sdisposition of property – Sales free and clear.”)

Objections by a Borrower/DebtorSometimes a receiver’s sale is preferable to preserve the real

property collateral’s value, which situation regularly arisestoday with failed real estate developments where constructionhas stopped, partially completed residential units dot thelandscape, and completed houses or condominiums standvacant and unprotected.2 Secured lenders often seek to havereceivers complete and sell units (or the entire project), topreserve the value of these “perishable” properties, and a courtmay find that there is a contractual right to do so under thesecurity agreements which typically give lenders the authorityto “protect” their collateral.

Continued from page 1.

Real Property Receiver’s Sales...

Please contact: LORA WONGSenior Vice President, Division Manager

213.362.5288 [email protected]

ONE MASTER FIDUCIARY SIGNATURE CARD AND A DEDICATED RELATIONSHIP BANKER TO ASSIST YOU WITH EVERY STEP ALONG THE WAY


• Fall 2010


In Pari Delicto...

• The defendants claim that the receiver, standing in theshoes of the debtor, is barred from suing them due tothe bad acts of the corporation.

• Finally, the receiver throws up his hands and says, “Iwasn’t even in the room at the time.”

So… who is responsible for the damages caused by thecombined wrongful conduct of the Ponzi debtor’s insiders,lawyers and auditors? Can the receiver really be heldresponsible for others’ bad acts that preceded his appointment?

The answer to these questions is ever-changing, governedby the applicable state laws of imputation and a court’sinterpretation of the in pari delicto doctrine.

The phrase in pari delicto means “in equal fault.” Thejudicial doctrine prevents a plaintiff who participates inwrongdoing from recovering damages resulting from thosewrongful acts. Third-party defendants may invoke the in paridelicto doctrine in receivership cases in an effort to bar thereceiver’s claims against them. They attempt to impute thecorporate insider’s wrongful conduct to the corporation itself,and then to the Ponzi case receiver as the corporation’ssuccessor-in-interest.

The ultimate authority — the United States SupremeCourt — says the in pari delicto doctrine is based on two

grounds: (1) “courts should not lend their good offices tomediating disputes among wrongdoers”; and (2) “denyingjudicial relief to an admitted wrongdoer is an effective meansof deterring illegality.” Bateman Eichler, Hill Richards, Inc. v.Berner, 472 U.S. 299, 306 (1985).

A. Application of In Pari Delicto to ReceiversEarlier cases declined to apply the in pari delicto doctrine

to receivers of corporate debtors pursuing third party claims,and courts permitted receivers to bring suit. Scholes v.Lehman, 56 F.3d 750, 754 (7th Cir. 1995) (holding that areceiver is not barred from pursuing fraudulent transfer claimsbecause “[t]he appointment of the receiver removed thewrongdoer from the scene”); FDIC v. O’Melveny & Meyers,61 F.3d 17, 19 (9th Cir. 1995) (“A receiver, like abankruptcy trustee and unlike a normal successor in interest,does not voluntarily step into the shoes of the [entity]; it isthrust into those shoes”, so “defenses based on a party’sunclean hands or inequitable conduct do not generally applyagainst that party’s receiver.”).

B. Subsequent Cases: The In Pari DelictoDoctrine May Apply to Receivers ExceptingExceptional Avoidance of FraudulentConveyance Actions

However, when the Seventh Circuit was subsequentlyfaced with claims other than fraudulent transfer claims, itlimited its holding in Scholes v. Lehman. In Knauer v.Jonathon Roberts Fin. Group, Inc., 348 F.3d 230, 236 (7th Cir.2003), it held that while the in pari delicto doctrine is not adefense against a receiver in exceptional circumstancesinvolving avoidance of fraudulent conveyances, it may applyas a defense to other types of claims brought by a receiveragainst third parties.

Courts continue to struggle with the issue applicability ofthe in pari delicto doctrine to receivers. Some courts followScholes v. Lehman and O’Melveny, and hold that the in paridelicto doctrine does not bar the receiver’s claims. See, e.g.,Harmelin v. Man Financial Inc., 2007 WL 2874043 (E.D.Pa.);Pearlman v. Alexis, 2009 WL 3161830 (S.D.Fla); Wuliger v.Mfrs. Life Ins. Co., 2008 WL 397591, at *8 (N.D.Ohio);Kirschner v. Wachovia Capital Markets, LLC (In re Le-Nature’sInc.), 2009 WL 3526569 at *2 (W.D.Pa.) (holding that theappointment of a receiver just days before the filing of abankruptcy case for the debtor was sufficient to wash theclaims of the in pari delicto taint so there was “nothing toimpute” to the trustee when the trustee later sued).

Other courts, howevevr, have followed the reasoning inKnauer, holding that the in pari delicto doctrine does apply toa receiver, unless any exceptions apply. See, e.g., In reWiand, 2007 WL 963165 *6-7 (M.D.Fla.); Marwil v. Cluff,2007 WL 2608845 *8 (S.D.Ind.); Hays v. Pearlman, 2010WL 4510956 (D.S.C.).


C. The Adverse Interest Exception Defeats theIn Pari Delicto Defense

If a receiver is in a jurisdiction that applies the in pari delictodoctrine to bar a receiver’s claims, the next question is whetherany of the exceptions to the doctrine apply. If so, the receiver’sclaims will still be allowed to proceed. The most frequentlyinvoked exception is the adverse interest exception. Underthis exception, the in pari delicto doctrine does not bar thereceiver’s claims if the officer (a) acted entirely in his owninterests and (b) adversely to the corporation. BankruptcyServs. Inc. v. Ernst & Young (In re CBI Holding Co., Inc.), 529F.3d 432 (2d Cir. 2008).

However, courts have varied in applying the adverseinterest exception to the in pari delicto doctrine, considering thefollowing issues:

1. Total Abandonment of the CorporationsInterests

Some courts hold that the in pari delicto doctrine bars thereceiver’s claims only when (a) the guilty manager “totallyabandoned” the interest of the principal corporation and (b)the corporation received no benefit whatsoever from theagent’s fraud. Thabault v. Chait, 541 F.3d 512, 527 (3d Cir.2008). The agent’s looting of a corporation in a Ponzi schemeis a “classic example” of an adverse interest that does not barthe receiver’s claims under this interpretation. Baena v.KPMG, LLP, 453 F.3d 1, 8 (1st Cir. 2006).

2. The Agent’s Subjective MotiveOther courts look to the agent’s subjective motives instead

of the benefit that the debtor received from the agent’sactivities. CBI Holding, 529 F.3d at 451 (stating, “the ‘totalabandonment’ standard looks principally to the intent of themanagers engaged in the misconduct”). This position has beencriticized, however, as making the adverse interest exceptiontoo expansive. Kirschner v. KPMG, LLC, 2010 WL 4116609(S.D.N.Y.).

3. Long Term vs. Short Term BenefitIf the agent’s fraud resulted in benefit to the corporation, it

may bar the receiver’s claims by preventing the application ofthe adverse interest exception to the in pari delicto doctrine.However, courts disagree on whether a short benefit issufficient to bar the receiver’s claims. Such a short term benefitmight come from a loan or new investor funds that the debtorobtained by utilizing fraudulent financial statements. Somecourts have held that a short term benefit, even of limitedduration, is enough to bar the receiver’s claims by preventingthe application of the adverse interest exception. These courtsfurther conclude that “the ultimate fate of [the debtor] does notdecide the question of benefit.” Grede v. McGladrey & Pullen,LLP, 2009 WL 3094850 *6 (N.D. Ill. 2009); Baena v. KPMG,LLP, 453 F.3d 1, 7 (1st Cir. 2006) (holding that the adverseinterest exception is not automatically triggered whenevermisconduct contributes to a future financial harm).

However, other courts have found that this short termbenefit is illusory and should not qualify as benefit to thecorporation that negates the adverse interest exception. CBIHolding, 529 F.3d at 453 (“Prolonging a corporation’s existencein the face of ever increasing insolvency may be ‘doing no morethan keeping the enterprise perched at the brink of disaster.’”);Thabault v. Chait, 541 F.3d at 528-29 (“inflating a corporation’srevenues and enabling a corporation to exist beyond insolvencycould not be considered a benefit to the corporation”).

4. Sole Actor LimitationAn exception to the adverse interest exception makes the in

pari delicto doctrine even more complex. It is known as the“sole actor” rule. If the agent principal of the debtorcorporation and the principal are essentially one and the same,then the misconduct of the agent principal will be imputed tothe debtor corporation and in pari delicto will bar the receiver’sclaims even if the adverse interest exception might otherwiseallow them. See Breeden v. Kirkpatrick & Lockhard LLP (In reBennett Funding Group), 336 F.3d 94, 100 (2d Cir. 2003);Grassmueck v. Am. Shorthorn Assoc., 402 F.2d 833, 838 (8thCir. 2005) (“where the principal and agent are alter egos, there


In Pari Delicto...

Fall 2010 •


• Fall 2010

Fall 2010 •

In this time of a downturn in business and leisure travel citiesand counties across the nation are collecting lower tax incomefrom overnight room sales tax and hotel transient occupancy tax(“TOT”) at area lodging facilities. This loss is particularlycritical from popular tourist destination hotels and resorts.

Even worse, hotel TOT is often underreported or not paid atall by hotel owners who face dramatic reduction in their owncash flow. Some dubious owners skim income off room revenuesbefore reporting reduced tax amounts to be paid even in goodeconomic times. Much of this abuse goes undiscovered for longperiods unless the taxing city or county has the financialresources to perform periodic audits or do a substantialcomparative analysis of like properties.

The problem is less pointed for hotels that are branded orfranchised, where room revenues are tracked through theoperator’s / franchisor’s reservation and property managementsoftware. This assures reliable revenue figures to calculate hotelTOT. But this does not solve a second problem — the ownerusing the collected hotel TOT as a line of credit rather thantimely paying it to the taxing entity.

To Receive or Not To ReceiveA limited purpose court–appointed receiver may be an

appropriate next step where there is a substantial backlog ofhotel TOT to be paid, and there is no suitable recourse planfrom the owner to pay the backlog. Placing a hotel intoreceivership to collect a debt, like unpaid taxes, typically placesthe entire estate, including the hotel’s property and business, inthe hands of a receiver. A receivership this sweeping typicallyprovokes a fight from the owner, who does not want to losecontrol of the business. A full-purpose hotel receivership mayalso be thought too intrusive by a judge. Many judges do notwant an outside party interfering with an independent ownerand its business without significant cause to force such a hotelreceivership action.

Where the objective is to jump-start the collecting andpaying of both current and overdue hotel TOT, a “limited-purpose” receivership is an appropriate and less costlyalternative. The best mechanism is for all the parties – thetaxing entity and the owner – to stipulate to a court-appointedreceiver taking control over the bank deposit accounts whilethe hotel continues business as usual. Short of this cooperationthe city or county will have to convince the judge thatappointment of a limited capacity receiver can easily satisfycollecting the TOT judgment / debt, while creating littleinterference with hotel daily operations.

The defaulting owner may benefit from such a carefully-crafted receivership solution. The city or county may be willing

to forego future interest and collection fees on past-due TOT aspart of the hotel receivership cost. The owner may avoid furthertax liens and defaults while the receiver controls accounts andmakes payments on an agreed-upon plan.

Often the appointment of a full-purpose receiver to take overan entire hotel business triggers a default or adversary action byone the hotel’s mortgagors or franchisor (or operator). A less-intrusive limited-purpose hotel receivership can be conductedwithout impact to the hotel’s lenders or franchisor.

Hotels are complex assets. Such a limited-purpose receivershould have specific expertise and experience in hoteladministration (and the nuances of lodging operation, staffingand dealing with its many customer accounts). Equallyimportant is that the aggrieved city or county consultsexperienced legal counsel regarding its legal options and howthey play out in the context of applicable law.

Creative Receiverships

Using A Limited Purpose Receivership ToCollect Hotel Transient Occupancy TaxesBY DENNIS GEMBERLING*


FRANDZEL ROBINS BLOOM & CSATO, L.C.

6500 Wilshire Blvd. Seventeenth Floor

Los Angeles, CA 90048 Telephone: (323) 852-1000

Fax: (323) 651-2577

100 Bush Street Twenty-third Floor

San Francisco, CA 94104 Telephone: (415) 788-7400

Fax: (415) 291-9153

Real Estate Finance & Transactions

Financial Services

Creditors’ Rights & Commercial Litigation

Equipment Leasing

Bankruptcy & Business Reorganization

Receiver Representation

Service . . . The Final Word

F

B C

R

Contact: Craig A. Welin, Esq.

E-mail: [email protected]

www.frandzel.com

C

Andrew ZimbaldiAlden Management Group

Tel: 714-751-7858

[email protected]

is pleased to announce

his appointment as

Rents & Profits Receiver

for Lange vs. Mirow

Superior Court of California

County of Los Angeles

William J. McDermottAlsace Advisors, LTD

Tel: 408-484-9011

[email protected]


his appointment as

Operating Company Receiver

for Limo’n Salon


County of Santa Clara

Douglas P. WilsonDouglas Wilson Companies

Tel: [email protected]

is pleased to announcethe completion of his duties as

Receiver forMacDougall Properties, LLC

The 11,033 sf mixed-use historicOld Malibu Courthousein Malibu, California

Superior Court of CaliforniaCounty of Los AngelesCentral Judicial District


Tel: 619-641-1141

[email protected]


his appointment as

Receiver for Highlands Hotel

Residences, A 3.4 acre parcel

of land in Tahoe, California


County of Placer


Tel: 619-641-1141

[email protected]

is pleased to announcehis appointment as

Receiver for Galaxy San DiegoA 294 unit condo in San Pedro,

California

Superior Court of CaliforniaCounty of Los AngelesCentral Judicial District


Tel: 619-641-1141

[email protected]


his appointment as

Receiver for Moody National FISHS

Two extended stay hotels in

Des Moines, Iowa

Iowa District Court

County of Dallas

Mark WeinsteinMJW Receivers

Tel: 310-395-3430x126

[email protected]


his appointment as

Receiver for NBGI Homes LLC

33 unit condo construction

receivership




Tel: 310-395-3430x126

[email protected]


his appointment as

Rents & Profits Receiver for Palm

Springs Desert Park Associates, LLC

156 unit Multifamily


Riverside County


Tel: 310-395-3430x126

[email protected]


Receiver for North Park Village L.P.3,800 acres that receiver will take

through entitlement and predevelopment process

Superior Court of CaliforniaVentura County

• Fall 2010

Brenda Roberts, Ed.D, CGBP, CGPHome Management Group, Inc

Tel: 415-884-2504

[email protected]

is pleased to announceher appointment as

Warranty advisor and repairspecialist for a Rents and Profits

receiver for North NautilusCondominiums, Robert Upton,

Receiver

Superior Court of CaliforniaSolano County

Michael E. Bubman, Esq.Mirman, Bubman & Nahmias, LLP

Tel: [email protected]


Successfully obtained theappointment of an OperatingCompany Receiver over the

operations of a continuing careretirement community.

Lake Oroville Country Residence,dba Country Crest

Superior Court of CaliforniaCounty of Sacramento

Robert C. Warren IIIInvestors’ Property Services

Tel: 949-900-6161

[email protected]


his appointment as

Rents & Profits Receiver for

12320 Burbank Apts I, LLC

2nd Judicial District Court

State of Nevada

Robb Evans & Associates LLCTel: 818-768-8100

[email protected]


its appointment as

Equity Receiver in the matter of

United States of America v.

Howard J. Awand and Linda Awand,

et al.

United States District Court

District of Nevada

Todd Wohl

Braun Inc.

Tel: 310-798-3123

[email protected]

The sale of two Wyndham hotels

at the direction of Rusty Wallace,

MARS LLC., Equity Receiver

California State Court

Joel B. WeinbergInsolvency Services Group, Inc.

Tel: (310) 385-0006

www.usisg.com


the completion of his duties

as Collateral Receiver for

The Silk Trading Company, Inc.

United States District Court

Central District of California

Joel B. WeinbergInsolvency Services Group, Inc.

Tel: (310) 385-0006

www.usisg.com


the completion of his duties

as Equity Receiver for

Advanced Building Maintenance, Inc.



West District

Robb Evans & Associates LLCTel: 818-768-8100

[email protected]

is pleased to announceits appointment as

Equity Receiver in the matter ofPeople of the State of California v.

Iskin, Karpman, Kogman &Yechizkia, et al.

A California Department of JusticeRegulatory Receivership

Superior Court of CaliforniaLos Angeles County

William A. Bramley, Esq.Law Offices of William A. Bramley, P.C.

Tel:619-232-1400

[email protected]

is pleased to announcethe successful conclusion

as counsel for Morrie Aaron,receiver, of the receivership estate

of Del Norte Chevrolet

Operating Company Receivership

Superior Court of CaliforniaImperial County

Fall 2010 •

Patrick GalentineCoreland Companies

Tel: 714-573-7780

[email protected]


his appointment as

Rents & Profits Receiver

for U.S. Bank vs. Gateway

at Mountain Village


San Bernardino County


Tel: 714-573-7780

[email protected]


his appointment as


U.S. Bank vs. JS Northpointe


Orange County


Tel: 714-573-7780

[email protected]


his appointment as


U.S. Bank vs. First Mission

Properties


Riverside County

J. Benjamin McGrewTel: 916-482-5100

[email protected]


his completion of

Rents & Profits Multi-family

Receiver for East West Bank v.

Waverly Logan


County of Sacramento


[email protected]


his appointment as


Receiver for East West Bank v.

Russell Harris


San Joaquin County


[email protected]

Is pleased to announce

his appointment as


Receiver for Luther Burbank Savings

v. James Mastorakos


Contra Costa County

Edythe L. BronstonLaw Offices of Edythe L. Bronston

Tel: 818-528-2893

[email protected]


her appointments as

Operating Company Receiver for

AAA -1 Hearing Services, Inc.



Robert P. MosierMosier & Company, Inc.

Tel: 714 432-0800 x222

[email protected]


his appointment as

Receiver for Brookhurst Plaza

In an ownership dispute and real

estate partition

Superior Court of CaliforniaCounty of Orange

Robert P. MosierMosier & Company, Inc.

Tel: 714 432-0800 x222

[email protected]

is pleased to announce his appointment as

Receiver for Foot Technologies, Inc.

A family law dispute and potential

dissolution



• Fall 2010

Robert C. GreeleyGreeley, Lindsay Consultant Group

Tel: 916-484-4800

[email protected]


his appointment as

Enforce Judgment Equity Receiver

for Fiberwood, LLC


County of Sacramento

Give the Gift of Membership‘Tis the Season to Renew! It’s time to renew your local forum membership or join for the first time. Keep in touch with the

statewide network of over 1,000 (and growing) receivership professionals. Just $125 for new members and $100 for renewingmembers (substantial reduced rates for same-firm multiple members & government employees). Even better, register for Loyola IVand first year’s dues are included in seminar pricing.

Just visit www.receivers.org/chapter to contact your local forum administrator for an application.Season’s Greetings!~Toni, CRF State Administrator

Stephen J. Donell

FedReceiver

Tel: 310-07-8481

[email protected]


his appointment as

Government Enforcement Receiver

for SEC v. Advanced Money

US District Court

Southern District of California

Stephen J. DonellFedReceiver

Tel: 310-207-8481

[email protected]


his appointment as


Wells Fargo Bank, N.A. v.

Oladele Oduntan Aina



Fall 2010 •

• Fall 2010


In Pari Delicto...

is no reason to apply an adverse interest exception to thenormal rules imputing the agent’s knowledge to the principal,because ‘the party that should have been informed [of thefraudulent conduct] was the agent itself albeit in its capacity asprincipal.’”).

5. “Innocent Decision Maker” ExceptionThe sole actor exception to the adverse interest exception

has its own exception in some jurisdictions where courts add astep after the “sole actor” analysis to consider whether therewere innocent decision makers in the corporate structure thatcould have or would have stopped the wrongful conduct hadthey been aware of it. See, e.g., Official Comm. of UnsecuredCreditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir.2006). If not all of the “shareholders and/or decision makers areinvolved in the fraud” so that there was at least one innocentinsider to whom the defendants could have reported theirfindings, then the in pari delicto doctrine does not bar the claims.Secs. Investor Protection Corp., v. BDO Seidman, LLP, 49 F.Supp. 2d 644, 650 (S.D.N.Y. 1999).

However, many courts have rejected the “innocent decisionmaker” doctrine. See, e.g., Baena v. KPMG LLP, 453 F.3d 1, 9(1st Cir. 2006) (court rejected the innocent maker doctrine as a

“radical alteration” that “clearly deviate[d] from traditionalagency doctrine”).

D. A Special Exception for AuditorsSome courts appear to have created a special exception to

the in pari delicto doctrine for auditors and allowed a receiver’sclaim against an auditor when the auditor was engaged innegligent or collusive behavior. The New Jersey SupremeCourt held that the in pari delicto doctrine does not bar anegligence claim against a corporation’s auditors. NCP Litig.Trust v. KPMG LLP, 901 A.2d 871, 882-83 (N.J. 2006) (claimpermited “against an auditor who was negligent within thescope of its engagement by failing to uncover or report the fraudof corporate officers and directors”).

The Pennsylvania Supreme Court similarly refused to applyin pari delicto where “the defendant materially has not dealt ingood faith with the principal.” Official Comm. Of UnsecuredCreditors of Allegheny Health Educ. & Research Found. v.PriceWaterhouseCoopers, LLP, 989 A.2d 313, 339 (Pa. 2010)(“This effectively forecloses an in pari delicto defense forscenarios involving secretive collusion between officers andauditors to misstate corporate finances to the corporation’sultimate detriment.”).

These courts conclude that the auditors were engaged todetect the fraud in the first place and cannot use the fraud theyfailed to detect to bar claims against them. E.S. Bankest, 2010WL 1417732 at *10; Thabault v. Chait, 541 F.3d at 529 (holdingthat the auditor was not a victim of the agent’s fraud and that“allowing the auditor to invoke the in pari delicto doctrine wouldnot serve the purpose of the doctrine—to protect theinnocent.”).

On the other hand, some courts place the blame on thedebtor’s insiders rather than the auditors and reach the oppositeconclusion. “[I]f the owners of the corrupt enterprise are allowedto shift the costs of its wrongdoing entirely to the auditor, theirincentives to hire honest managers and monitor their behaviorwill be reduced.” Cenco Inc. v. Seidman & Seidman, 686 F.2d449, 456 (7th Cir. 1982).

The New York Court of Appeals (that state’s highest court)recently issued a significant decision, holding that evennegligent and collusive auditors can assert the in pari delictodefense to bar the claims against them. Kirschner v. KPMG,LLC, 2010 WL 4116609 (S.D.N.Y.). This decision clearly sideswith the auditors and potentially other third party defendants,providing them a safe harbor even in the face of collusivebehavior. Hence, at least in New York, fingers will be pointedback at the innocent successor-in-interest receiver, and thereceiver may quite likely be barred from pursuing third partyclaims.

*Kathy Bazoian Phelps, Esq. is a partner at the Los Angeles financial law firmDanning, Gill, Diamond & Kollitz, LLP. She has special expertise in all areas ofbankruptcy and receivership law and in representing trustees and receivers inlarge-scale litigation involving fraudulent and Ponzi schemes. She is a BoardMember of the Los Angeles/Orange County Chapter of the California ReceiversForum.

reliability

Sophisticated claims management

Flexible and customizable

Advanced search functionality

Hassle-free distribution

FOR MORE INFORMATION, CONTACT:

Mitch Ryan at 310 720 4912 or [email protected]

Michelle Salazar at 310 712 6270 or [email protected]

WWW.EPIQSYSTEMS.COM 800 314 5550

simplify case administration and reduce overhead

Fall 2010 •

Triple Crown Insurance

Triple Crown Insurance Services prides itself on its stability, knowledge,professionalism and staying power in today's changing insurance environment.We treat our clients as partners.

We can handle the most challenging business situations and opportunitiesimaginable. We develop solutions that take advantage of the current insurancemarkets and provide competitive insurance policies so your business can besuccessful.

Triple Crown Insurance Services is licensed for property/casualtyinsurance in all 50 states as well as the District of Columbia.

Triple Crown Insurance Services, Inc.6151 Fairmount Ave., #211San Diego, CA 92120

Phone: 619-280-8700 • Fax: [email protected]

Call for a free quote

Our Insurance Clients:ReceivershipsAccountantsLenders with REO & OREO PropertiesAsset ManagersConflict Resolution SpecialistsProblem Resolution Specialists

Measure Twice, Cut OnceIt is particularly critical for a receiver appointed in a limited

purpose capacity to have everything clearly defined and spelled out inthe appointing order. It is also best for the city or county plaintiff’scounsel to speak with the proposed receiver before petitioning thecourt. The receiver can propose the specific language, instructions andauthority required in the hotel receivership order to allow the receiverto perform his or her duties efficiently.

A key issue affecting a receiver’s take-over of necessary bankaccounts is to understand where those monies flow from therespective hotel revenue deposits and on-site propertymanagement systems. Equally important is that the receiver bethe sole signatory on these same bank accounts, to avoid futureconflicts with the owner.

It is also important to identify and specify what theindividual deposits that will be controlled by the receiver consistof and in what form the assets flow within the hotel’s operation.Deposits may be in the form of cash, credit cards, guest advancedeposits or gift certificate payments.

Other aspects of daily deposits are often overlooked wherethe receiver should gain control under the order. These includeaccounts receivable, which includes company and group billingsand set asides for FF&E (fixtures, furnishings and equipment)reserves (often required by a lender or franchisor). This canamount to a large sum in airport hotels that hold several airline

crew contracts, or major convention center hotels, with manygroup meeting accounts. Even should the owner lose the hotel toother creditors or incur a major judgment, the receiver will stillretain control of these accounts pursuant to the appointingorder. The receiver will be able to continue accounts receivablecollections to be used toward satisfying the city’s or county’sTOT judgment.

Limited Hotel Receivership OverviewOnce appointed a limited-purpose receiver charged to collect

the hotel TOT, will perform duties similar to those in a full-purpose hotel receivership. He or she will take control of all ofthe bank accounts and evaluate the economic viability of theproperty to support the receiver’s actions during the term of thelimited-purpose receivership.

This economic evaluation requires an understanding of theimpact of the bank-deposit set-asides for payment of the currenthotel TOT as well for as payments under the delinquent TOTinstallment plan, and impact on the day-to-day operations cashflow. Absent surprises and assuming the economic viability of alimited-purpose receivership, the receiver can proceed withher/his duties. In marked contrast to a full-purpose hotelreceivership, usually the only assets the limited purpose receiverwill inventory and control (for the purpose of enforcing and


Creative Receiverships...


collecting the hotel TOT judgment) are those set aside from thedaily deposits, accounts receivables and FF&E reserves accounts.

The receiver can easily set up a simplified off-site accountingsystem separate from the hotel’s accounting in order to monitor,control and transfer monies from the bank deposit accounts on adaily basis to the respective parties other bank accounts whichthe agreed-upon plan will control. The receiver will often makeset-asides daily for payment to the city or county and to payhotel receivership costs. Remaining sums will then betransferred to the hotel’s operating accounts to fund itsoperations. A monthly accounting and report will be submittedto the court and the respective parties as part of the receiver’sduties, as in any other receivership.

Primary advantages of a limited-purpose hotel receivershipare less cost and intrusion to the day-to-day operation(contrasted with a full-purpose receiver taking over all of thehotel assets and operating its entire business). Significant savingsin time and travel for the receiver and receiver’s staff should alsobe realized, since regular visits to oversee the hotel’s day-to-dayoperation will not usually be necessary.

There are disadvantages to the described limited-purposereceivership, however. These can include a lack of cooperationfrom the owner and staff, increasing the time required for thereceiver to carry out his or her duties. This is especially true ifthe hotel’s daily reporting and banking information is not made

readily available or the receiver’s requests for answers andclarification are continually delayed. Lack of total control overthe entire hotel and its business may also pose a problem if thehotel is facing another default or judgment by an outside party.These defaults or judgments may require the limited-purposereceiver to seek further instruction from the appointing courtabout his/her continued duties.

Summing UpA limited-purpose hotel receivership as an alternative to a

full-purpose hotel receivership can provide economy of scale interms of costs and efficiency for collection of a city or countyTOT judgment. It can also be a suitable vehicle for the owner tosatisfy the hotel’s TOT obligations while continuing to operatehis/her business with minimal outside interference.

This assumes that the parties are open to such anarrangement. When seeking appointment of a limited capacityreceiver such as this, it is especially important that theappointing court order be both comprehensive and address issuesspecific to a hotel and its operating environment. Overridingthis, however, is the importance of cooperation between theparties if the receiver is to be successful in carrying out his or herduties in a timely and cost-effective manner. Absent suchcooperation, the city or county may be better off petitioning thecourt for a full-purpose hotel receivership to collect its TOTjudgment.

• Fall 2010

Dennis Gemberling


Creative Receiverships...

ALBANY ATLANTA BRUSSELS DENVER LOS ANGELES NEW YORKPHILADELPHIA SAN DIEGO SAN FRANCISCO WASHINGTON, DC

McKenna Long & Aldridge LLP offers a

proven track record in the areas of receivership,

bankruptcy, and creditors’ rights.

Contact:

Gary Caris(213) 243-6107 phone

(213) 243-6330 [email protected]

444 South Flower StreetLos Angeles, CA 90071

www.mckennalong.com

*Dennis Gemberling, president of Perry Group International,brings 35-years’ experience to his appointments as a hotel andrestaurant receiver, property manager and consultant in thehospitality industry. Mr. Gemberling has managed, operatedand advised hundreds of hotels, resorts, restaurants,nightclubs and related lodging and foodservice businesses. Heserves as a vice president and board member of the Bay AreaChapter of the California Receivers Forum.

Bay Area Chapter Makes Charitable Grants: The Bay Area Chapter of theCalifornia Receivers Forum has announced its 2010 donations to charities TheRafael House, Habitat for Humanity, Self Help for the Elderly and Project OpenHand. Board members are (l-r) Meagen Leary, Kyle Everett, Randy Michelson,Richard Rogan, Ron Oliner, Susan Uecker and Jay Crom. Some $2,000 will bedonated by the Chapter to assist these charitable community organizations.

Receivers are employed in civil cases when absolutely needed tocontrol and protect an entity’s assets. All bench officers andlitigants in civil matters employing receivers should have a workingknowledge of this area of law.

What Is A Receiver?A receiver is a court officer who is appointed to take possession

of and to protect assets for the appointing court for the benefit of allpersons who may ultimately be shown to have an interest in thoseassets. The receiver acts under the court’s control and continuoussupervision. See Turner v. Superior Court of Kern County (1977) 72Cal.App.3d 804, 813.

California Rule of Court 3.1179 states that, “The receiver is anagent of the court, not of any party to the litigation, and as such: (1)is neutral; (2) acts for the benefit of all who may have an interest inthe receivership property; and (3) holds assets for the court, not theplaintiff nor the defendant.”

A receiver may be appointed, in the manner provided in Codeof Civil Procedure § 564 et seq., by the court in which an action orproceeding is pending in any case in which the law empowers thecourt to appoint a receiver. CCP § 564(a). Unlike an injunction,which may be either provisional or permanent, a receivership is onlya provisional remedy in an action that seeks some other relief byfinal judgment.

There is no substantive right to a receiver and no action for areceiver. Associated Creditors’ Agency v. Wong (1963) 216Cal.App.2d 61, 66. As the court said long ago in French Bank Case(1879) 53 Cal. 495, 552: “these subdivisions do not assume to createa sense of the right of action where none existed before. Their aim isto provide a more efficacious remedy to the conduct of actions, theright to bring which already exists, and are elsewhere provided for. .. . . There is, of course, no such thing as an action broughtdistinctively for the mere appointment of a receiver–such anappointment, when made, is ancillary to or in aid of the actionbrought. Its purpose is to preserve the property pending thelitigation so that the relief awarded by the judgment, if any, may beeffective. The authority conferred upon the court to make theappointment necessarily presupposes that an action is pendingbefore, instituted by someone authorized by law to commence it.”

When Is A Receiver Appointed?A receiver can be appointed only when authorized by statute or

equity. March v. Williams (1994) 23 Cal.App.4th 238, 247. Code ofCivil Procedure § 564 is the primary statutory authorization.

The most commonly relied upon provisions in § 564 are onesauthorizing a receivership, “In an action by a vendor to vacate afraudulent purchase of property, or by a creditor to subject anyproperty or fund to the creditor's claim, or between partners orothers jointly owning or interested in any property or fund, on theapplication of the plaintiff, or of any party whose right to or interestin the property or fund, or the proceeds thereof, is probable, andwhere it is shown that the property or fund is in danger of beinglost, removed, or materially injured” (CCP § 564(b)(1)); “In anaction by a secured lender for the foreclosure of a deed of trust or

mortgage and sale of property upon which there is a lien under adeed of trust or mortgage, where it appears that the property is indanger of being lost, removed, or materially injured, or that thecondition of the deed of trust or mortgage has not been performed,and that the property is probably insufficient to discharge the deedof trust or mortgage debt” (CCP § 564(b)(2)); and “Where acorporation is insolvent, or in imminent danger of insolvency, orhas forfeited its corporate rights” (CCP § 564(b)(6)).

There are many other specific statutory authorizationsthroughout the Codes. Examples include: Business & ProfessionsCode §§ 17203 and 17535 (in statutory unfair competition and falseadvertising cases); Code of Civil Procedure § 564(c) (to enable asecured lender to inspect real property for hazardous substances);Code of Civil Procedure § 708.630(b) (to transfer alcoholicbeverage license to satisfy money judgment); Family Code § 290(family law cases); and Code of Civil Procedure § 712.060 (toenforce judgment for possession or sale of property). Receivers alsoare appointed in post-judgment proceedings to aid in collectionefforts for judgment creditors. (CCP § 564(b)(3).)

Fall 2010 •

Refresher/Overview

An Introduction To ReceivershipsDAVID J. PASTERNAK, ESQ.*EDYTHE L. BRONSTON, ESQ.*


• Fall 2010

I was getting ready to wrap up a case recently when Igot a call from a former employee of the entity inreceivership who said his brother-in-law, a lawyer,told him that his claim for unpaid wages should be

paid on a priority basis. I looked at the sections of the Code ofCivil Procedure dealing with receiverships, Sections 564-570,and the Rules of Court and did not see anything about wagepriorities. Is the former employee correct?

Yes. There are a number of statutes that affectreceiverships that are not readily apparent. C.C.P.§1204, concerning labor claims, is one of them. Itprovides, in part, “When any assignment…is made

for the benefit of creditors… or results from any proceeding ininsolvency or receivership…or when any property is turned overto the creditors…or to a receiver or trustee for the benefit ofcreditors, the following claims have priority in the followingorder:

(a)…$4,300.00 for each individual or corporation…earnedwithin 90 days before the assignment…the commencement ofthe court proceeding or the date of the cessation of the debtor’sbusiness, whichever first occurs of the following:

(1) Wages, salaries or commissions, including vacation,severance and sick leave earned by an individual;…

(b) …contributions to employee benefit plans arising fromservices rendered within 180 days before the assignment…[orreceivership]…”

The statute has two other interesting provisions, which Iwould wager are not generally followed by receivers. Subsection(c) provides: “The above claims shall be paid…before the claimof any other creditor…and shall be paid as soon as the moneywith which to pay same becomes available.” Subsection (d)goes on to provide: “This section is binding upon all courts ofthis state and in all receivership actions the court shall orderthe receiver to promptly pay out of the first receipts andearnings of the receivership, after paying current operatingexpenses, such preferred labor claims.”

The legislature has made it clear that receivers and assigneesshould not wait until the end of the case to pay these laborclaims. The statute directs receivers, in two different sections,to pay these claims as soon as possible.

There are two issues that do arise under the statute. First,the statute directs that the labor claims be paid “promptly out ofthe first receipts and earnings” but then goes on to state “afterpaying current operating expenses”. What does that mean?Second, is the statute applicable in federal receiverships?

As to the first question, a receiver can wait to pay laborclaims until he or she has sufficient funds in the estate to payany “current operating expenses”, which would include fees andcosts owed to the receiver and his or her professionals, as well assufficient funds, if applicable, to run the business or property.When sufficient funds exist, however, the receiver should seekinstructions to pay the labor claims (which the statute states“the court shall order”) rather than waiting until the end of thecase. This would not be true if the matter were an assignmentfor the benefit of creditors. There, the wage claims would havepriority over the assignee’s fees and expenses, becausesubsection (d) providing for payment “after paying the currentoperating expenses”, only applies to receiverships. This is onereason a receivership may be preferable to an assignment.

This interpretation of the statute has been affirmed by the9th Circuit and California cases. In Division of LaborEnforcement v. Stanley Restaurants, 228 F. 2nd 420 (9th Cir.1955), the 9th Circuit had previously reversed the district courtwhen it held that labor claims had priority over taxes owed thefederal government (another priority to remember that is notapparent in the C.C.P. But note, state taxes do not have apriority because Revenue and Taxation Code §6756 specificallystates that §1204 claims have priority).

The district court then held that the assignee’s fees andexpenses were senior to the labor claims. The 9th Circuitreversed again, holding that under §1204 the labor claims takeprecedence in assignments but not in receiverships because thelegislature limited the payment of labor claims “after payingcurrent operating expenses” to receivership cases.

Ask The ReceiverBY PETER A. DAVIDSON*

Q

A


Code of Civil Procedure § 564(b)(9) also reemphasizes thecourt’s equitable power to appoint a receiver by providing that onemay be appointed “In all other cases where necessary to preserve theproperty or rights of any party.” Equity receiverships are ofteninstituted by an action brought by a governmental regulatoryagency, with the result that the receiver takes possession of all assetsfor the benefit of all creditors. This type of receiver can be likenedto a bankruptcy trustee.

The appointment of a receiver can be a very effective way toprotect assets in many types of disputes, pending the outcome oflitigation. Nonetheless, appointment of a receivership is a drasticremedy, wresting control of property from the owner’s hands. Thus,“ordinarily if there is any other remedy, less severe in its results,which will adequately protect the rights of the parties, the courtshould not take property out of the hands of its owners.” Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1953) 116Cal.App.2d 869, 873. “California rigidly adheres to the principlethat the power to appoint a receiver is a delicate one which is to beexercised sparingly and with caution.” Morand v. Superior Court(1974) 38 Cal.App.3d 347, 351.

The appointment, or the refusal to appoint a receiver, is withinthe discretion of the trial court. “The rule is established that theappointment of receiver rests largely in the discretion of the trialcourt and that its action and appointing a receiver or its refusal ofan application for the appointment of such an officer will not bedisturbed in the absence of a showing that the court’s discretion hasbeen abused.” City and County of San Francisco v. Daley (1993) 16Cal.App.4th 734, 744.

The Receiver And His Or Her PowersUnless the parties file a written consent, a receiver may not be a

party, an attorney of a party, a person interested in the action, or aperson related to any judge of the court by consanguinity or affinitywithin the third degree. CCP § 566.

The receiver “must be sworn to perform the duties faithfully.” CCP §567(a). The receiver must give an undertaking to the State of California“in such sum as the court or judge may direct.” CCP § 567(b).

The receiver’s powers are those specified in the applicablestatutes and court orders. The primary source of the receiver’spowers are the court’s orders. See Nulaid Farmers Ass’n v. LaTorre(1967) 252 Cal.App.2d 788, 791. Because the appointing order is sosignificant, it should be carefully drafted so as to anticipate thepowers and instructions that the receiver may require. The JudicialCouncil has promulgated form receivership orders for equity andrents-and-profits receiverships. The forms are not mandatory andmany receivers and attorneys prefer to use non-form orders.

Typical provisions in an appointing order include the following:the receiver’s power to employ employees and professionals; thereceiver’s power to operate and/or liquidate a business; the receiver’spower to enter into contracts or leases; the receiver’s authority to use alocksmith to enter the receivership premises; the receiver’s authorityto bring and defend actions; the receiver’s obligation to investigate,report about, and maintain adequate insurance coverage regarding thereceivership estate; a provision regarding payment of the receiver’sfees and costs, as well as the fees and costs of other professionalsemployed by the receiver; and, a provision that the receiver may sellreal or personal property of the estate. CCP § 568.5. Note that areceiver may not employ an attorney without a specific court orderauthorizing such employment. California Rule of Court 3.1180.

The court’s order further sets forth the compensation due to thereceiver and the frequency of reports he or she must submit to thecourt regarding the entity it is protecting.

A court order is required to terminate a receivership. Upon courtapproval of the receiver’s final report and account, the receiver isdischarged and his or her bond exonerated. California Rule of Court3.1184. The court’s order terminating the receivership barssubsequent action against the receiver by all parties who receivednotice, for the receiver’s failure to properly perform duties. AviationBrake System Ltd. v. Voorhis (1982) 133 Cal.App.3d 230, 234.

Contempt ProceedingsReceivership orders are enforceable through contempt

proceedings. In general, disobedience of receivership orders hasincreased in recent years, and contempt proceedings in receivershipcases has become a more frequent occurrence. When there has notbeen compliance with a court order, a receiver must considerwhether it is appropriate to institute a contempt action.

The contempt proceeding is initiated by the filing of evidentiaryaffidavits (or declarations) [Code of Civil Procedure § 1211],together with an application for the issuance of an order to showcause. These documents detail the violations of the court’s orders,and must be personally served on the alleged contemnor. Everyseparate act of disobedience of a court order is a separate contempt


Introduction To Receiverships...


Fall 2010 •

and punishable as such. In re Stafford (1958) 160 Cal.App.2d 110,113-114.

There are four elements that must be proved to establish acontempt violation: (1) the issuance of a valid court order; (2) thecontemnor’s actual knowledge of the order; (3) the contemnor’sability to comply with the order; and (4) the contemnor’s willfuldisobedience of the order. See Conn v. Superior Court (1987) 196Cal.App.3d 774, 784.

A common contempt application in a receivership case involvesa defendant who fails to turn over funds to the receiver incompliance with a court order. In order to establish a contemptclaim in such a case, the receiver must prove that the defendant hadfunds to turn over to the receiver. It is not enough to simply provethat the defendant disobeyed the order to turn over funds to thereceiver. In re Cassil (1995) 37 Cal.App.4th 1081, 1087-1088.

Unlike civil proceedings such as receivership hearings, acontempt proceeding is quasi-criminal. The alleged contemnors arepresumed innocent and all of the elements of contempt allegedagainst the contemnors must be proved beyond a reasonable doubtrather than by a mere preponderance of the evidence. Bennett v.Superior Court (1946) 73 Cal.App.2d 203, 210. Perhaps mostimportantly, the alleged contemnor has the right against self-incrimination, and cannot be compelled to testify. In re Witherspoon(1984) 162 Cal.App.3d 1000, 1002. Thus, a receiver (or a party)bringing a contempt action must be able to prove each element toestablish the contempt violation without any testimony by thealleged contemnor.

A person guilty of contempt may be fined $1,000 andimprisoned for 5 days for each contempt violation. CCP § 1218(a).Imprisonment for contempt is rare. The fines are paid to the State ofCalifornia, and not to the receivership estate.

A party to an action who is found in contempt may be orderedto pay to the party initiating the contempt proceeding thereasonable attorneys’ fees and costs incurred by the party inconnection with the contempt proceeding. CCP§ 1218(a). These fees and costs usually exceedthe statutory fines that are available. Judges areusually willing to award these fees and costs ifthey are requested. They are not available againstnon-parties.

[Reprinted and/or posted with the permission of Daily JournalCorp. (2010).]

*Edythe L. Bronston, Esq. is an attorney and receiver inSherman Oaks, California. She is a co-founder and past-president of both the Los Angeles/Orange County chapter ofthe California Receivers Forum and the statewide organization.

*David J. Pasternak, Esq. is a founding co-chair of the LosAngeles/Orange County chapter of the California ReceiversForum, and a member of the Century City law FirmPasternak, Pasternak & Patton, a Law Corporation.

• Fall 2010


Introduction To Receiverships...

David J. Pasternak

Edythe L. Bronston

THELIST WHILE THERE IS NO COURT-APPROVED LIST OF RECEIVERS, THE FOLLOWING IS A PARTIAL LIST OF RECEIVERS

WHO ARE MEMBERS OF THE CALIFORNIA RECEIVERS FORUM AND HAVE CONTRIBUTED TO THIS PUBLICATION.

• This symbol indicates those receivers who completed a comprehensive16-hour course on receivership administration and procedures presentedat Loyola Law School in April 2000.

� This symbol indicates those receivers who completed a comprehensive16-hour course on receivership administration and procedures presentedat Loyola Law School in October 2004.

� This symbol indicates those who facilitated the October 2004 Loyola Law Schoolcourse.

� This symbol indicates those receivers who completed a comprehensive 16-hour courseon receivership administration and procedures presented at Loyola Law School inJanuary 2009.

� This symbol indicates those who facilitated the January 2009 Loyola Law School course.

AREA PHONE E-MAIL AREA PHONE E-MAIL

Fall 2010 •

Bay Area• David Bradlow 415-206-0635 [email protected]� Clay Dunning 925-210-0606 [email protected]

David A. Falls 925-933-2875 [email protected]�� Dennis P. Gemberling 415-434-0135 [email protected]��•Beverly N. McFarland 916-759-6391 [email protected]• Donald G. Savage 510-547-2247 [email protected]�� Kevin Singer 415-848-2984 [email protected]

David Summers 925-933-2875 [email protected] D. Upton 717-833-6173 [email protected] P. Wilson 619-641-1141 [email protected] Wilson 925-942-2600 [email protected]

Sacramento Valley��•Marilyn Bessey 916-930-9900 [email protected]�� Robert C. Greeley 916-484-4800 [email protected]� Donald A. Hildebrand 916-705-8160 [email protected]

Mark J. Len 916-927-0997 [email protected]��• J. Benjamin McGrew 916-482-5100 x 15 [email protected]��•Scott Sackett 916-930-9900 [email protected]�� Kevin J. Whelan 916-783-3552 [email protected] Area�• Steve Franson 559-930-8119 [email protected]�� Hal Kissler 559-256-4010 [email protected]� Terence J. Long 559-225-5688 [email protected]�� Jim Lowe 559-269-0484 [email protected] Angeles/Orange County/Inland Empire� Frank Borman 310-295-1676 [email protected]��• Edythe L. Bronston 818-528-2893 [email protected]

Weldon L. Brown 951-682-5454 [email protected] DeCarlo 714-751-2787 [email protected] Carlston 949-705-5038 [email protected]

�� Thomas Henry Coleman 661-284-6104 [email protected]��• Peter A. Davidson 310-273-6333 [email protected]

Richard K. Diamond 310-277-0077 [email protected]�� James H. Donell 310-207-8481 [email protected]�� Steve Donell 310-207-8481 [email protected]

Peter J. Doumani 310-278-6667 [email protected]� Gordon E. Dunfee 858-456-7111 [email protected]� Howard M. Ehrenberg 213-626-2311 [email protected]�� Robb Evans 818-768-8100 [email protected]

Rafael Figueroa 818-298-8896 [email protected] M. Frank 800-808-8559 [email protected]

� Louis A. Frasco 818-903-1883 [email protected]� Allen Freeman 310-234-8880 [email protected]

Patrick Galentine 714-573-7780 [email protected]��•David A. Gill 310-277-0077 [email protected]� James Granby 760-484-0678 [email protected]

Robert S. Griswold 858-597-6100 [email protected] Haddock 310-306-6789 [email protected] F. Hoffner 949-955-2994 [email protected] Hollowell 213-631-0812 [email protected] Ibarra 323-363-2468 [email protected] J. Joseph 310-277-0077 [email protected] Jordan 310-500-284x 202 [email protected]

� Nancy Knupfer 310-893-9611 [email protected] Lim 310-689-8118 [email protected] Mandel 310-276-2990 [email protected]

�• Byron Z. Moldo 310-273-6333 [email protected]

Los Angeles/Orange County/Inland EmpireMichael D. Myers 909-398-4200 [email protected]

��• George R. Monte 626-930-0083 [email protected]��• Douglas Morehead 949-852-0900 [email protected]��•Robert P. Mosier 714-432-0800 [email protected]�• Dennis M. Murphy 626-794-0288 [email protected]��•David J. Pasternak 310-553-1500 [email protected]�• James L. Peerson, Jr. 323-954-7575 [email protected]�� Theordore G. Phelps 213-629-9211 [email protected]�� Gary A. Plotkin 818-906-1600 [email protected]

John Rachlin 310-552-9064 [email protected]��•David L. Ray 310-481-6700 [email protected]� Terri L. Riker 949-337-2518 [email protected]

George E. Schulman 310-277-0077 [email protected]� Thomas A. Seaman 949-222-0551 [email protected]�� Kevin Singer 310-552-9064 [email protected]

Donald N. Soucy II 818-312-5818 [email protected]• Steven M. Speier 949-222-2999 [email protected]� David Stapleton 213-235-0600 [email protected]

Tim Strader Jr. 949-622-0420 [email protected]�• William E. Turner 714-228-9153 [email protected]�� David D. Wald 310-979-3850 [email protected]��•Robert C. Warren III 949-900-6161 [email protected]�� Richard Weissman 310-481-6700 [email protected]

Joseph S. Yarman 310-500-2840x203 [email protected]��• Adrian Young 909-945-4586 [email protected]�� Andrew R. Zimbaldi 714-751-7858 [email protected] Diego Area�� M. Daniel Close 858-792-6800 [email protected]� Gordon E. Dunfee 858-456-7111 [email protected]��• Mike Essary 858-560-1178 [email protected]��•Martin Goldberg 858-560-7515 [email protected]� Jim Granby 619-233-3131 [email protected]� Robert S. Griswold 858-597-6100 [email protected]�� Thomas C. Hebrank 619-400-4922 [email protected]�• William J. Hoffman 858-720-6700 [email protected]�• Richard M. Kipperman 619-668-4500 [email protected]��• George R. Monte 626-930-0083 [email protected]�• Dennis M. Murphy 626-794-0288 [email protected]

Douglas P. Wilson 619-641-1141 [email protected] Barbara/Ventura County� Gordon E. Dunfee 858-456-7111 [email protected]

Robert Gonzales 805-445-9182 [email protected] Mitchell 805-445-7121 [email protected]

��• George R. Monte 626-930-0083 [email protected]� Rajendra (Bob) Pershadsingh

805-617-0140 [email protected] C. Ricker 805-899-4304 [email protected]

� Barton Stern 805-484-0477 [email protected]

• Fall 2010

I have heard it many times during my thirty years working as aCPA in the area of fraud and internal accounting controls:

“My employees have been with me for years, they can be trusted. Iam much too busy running the business to worry about theaccounting details, and I have insurance if it ever happened to me”.Well, maybe so. But for trustees and others working with other

people’s money in a fiduciary capacity, ignoring the risks related tointernal fraud is a high stakes wager.

I’ve learned a few hard lessons over the years. First, good peopledo steal, from single mothers trying to pay for their kid’s educationto long-time employees who begin to believe that they are worthmore than they are being paid. As any police detective will tell you,theft is more about opportunity and motive than about being agood or bad person.

If the opportunity to steal exists and a “good” person isconfronted with circumstances that present them with a strongmotive, a long-trusted employee can become a criminal in aninstant.

Second, employees know when the boss is not paying attention.Our everyday actions make evident the tone and prioritiesestablished by top management. You may be heading for trouble ifupper management ignores internal controls, leavingimplementation to the accountants, with little to no oversight.There are many clever ways to take cash out the door without yourknowing about it.

Last, a few written policies are worth a thousand protestationswhen it comes to substantiating that you have been a good stewardfor your client’s assets and have fulfilled your fiduciaryresponsibilities. Your best defense against allegations of negligenceor lack of due care arising from a fraud-related theft is a formalwritten code of conduct, well-documented accounting and internalcontrol policies and procedures, and documented evidence ofcompliance with those procedures.

The responsibility for designing and implementing a goodsystem of internal control clearly rests on the owners, directors andofficers of companies. The risks of ignoring these responsibilitiesinclude large monetary losses and adverse judgments, denial ofclaims by insurance companies, loss of reputation and business, andeven potential personal civil liability. All of this can probably beavoided with a little effort and planning.

An adequate internal control system consists of three basicelements :(1) creating a culture of honesty and high ethics, (2)evaluating fraud risk and designing and implementing controls; and(3) compliance testing, reporting and oversight.

Creating a Culture of Honesty and High EthicsOwners, directors and officers must set a “tone at the top” that

demonstrates and requires ethical behavior. Setting the rightexample is critical to establishing a culture of honesty and ethicalbehavior. It is important to show employees through words andactions that management is paying attention and that dishonest orunethical behavior will not be tolerated.

A good first step in this direction is establishing a formal codeof conduct that clearly sets out the company’s expectations foremployee behavior and the consequences for violations in conduct.The written code should be sent to every employee annually,requiring written confirmation by the employee that theyunderstand and accept their responsibilities under the company’scode of conduct.

Evaluating Fraud Risk and Designing andImplementing Controls

The next steps in the process are to (1) evaluate the areas offraud risk, (2) design internal control policies and procedures tomitigate the risks, and (3) implement and document theperformance of these preventive and detective measures.

This is the most difficult part of the process. You have to fully

A Word To The Wise Dept.

Don’t Let Fraud Destroy Your Business:Use Internal Safeguards to Stymie CrimeBY: JEFF WHITTON, CPA*


Fall 2010 •

understand your accounting system and identify the areas wheresignificant risk of fraud exists. Your CPA or similar advisor maybe required to help you to identify all of the possible risk areas andto design policies and procedures that will mitigate these risks.

There exist a few simple procedures that can be implementedin almost every company that will go a long way in mitigating therisk of a fraud related theft.

• Use lockbox bank accounts for the deposit of all client cashreceipts. Lockboxes are accounts where cash receipts aresent directly to the bank and deposited into your bankaccount, so there is no risk of employee theft.

• If lockboxes are not practical, assign the responsibility ofopening the mail to an employee who does not have accessto accounting records, or to two employees together. Ineither case, all checks received in the mail should berestrictively endorsed for deposit only in the name of thecompany and an independent log of cash receipts should bemaintained for periodic comparison to the accountingrecords.

• The bank reconciliation, when done timely and correctly, isa control that can also significantly mitigate fraud riskrelated to theft of cash receipts and/or the issuance ofunauthorized cash disbursements. To be dependable,however, the reconciliation must be performed byemployees who do not have access to asset or accountingrecords. If this is not practical — which is the case in manysmaller companies – have a senior level manager outside ofthe accounting department review the bank reconciliationfor unusual reconciling items on a periodic basis.

These simple procedures can be implemented with very littleeffort and will significantly mitigate your fraud risk related to cashreceipts and disbursements.

After all of the controls have been adequately designed, it isimportant that they be well documented and that your accountingstaff is adequately trained in their proper implementation. Theaccounting staff should be required to document their compliancewith the policies and procedures as they are performed, as part ofthe process. Documentation is critical to be able to testcompliance with the controls and to provide the evidence of thefulfillment of your fiduciary responsibilities in this area.

Compliance Testing, Reporting and OversightThe oversight process consists of two basic elements (1)

ongoing monitoring of compliance with controls and (2)reporting results to owners, directors and officers ultimatelyresponsible for oversight.

In many larger organizations this function is performed by theinternal audit department and the audit committee of the board ofdirectors. In smaller companies it can be performed by the owneror by a committee of employees outside of accounting and/or bythe company’s CPA. The objective is to perform a periodic reviewand compliance testing of the control procedures to ensure thatthey have been implemented and are continuing to work asdesigned. Again this process should be adequately documented todemonstrate your effort to meet your fiduciary responsibilities.

Like it or not, as a fiduciary you have a legal responsibility tomaintain an adequate system of internal accounting control toprotect the assets under your care. The risks of ignoring thisresponsibility can be significant, including the loss of yourreputation and business. An adequate system of internal controlrequires (1) creating a culture of honest and high ethics, (2)evaluating fraud risk and designing and implement controls, and(3) periodic compliance testing, reporting and a formal oversightprocess. These three factors are inter-dependent — all must bepresent to create an adequate system of internal controls for yourcompany.

Accounting fraud and internal controls are not the mostexciting topic, but when you are in the business of managing andprotecting other people’s money, it is a topic that should be closeto your heart. When it comes to fraud, trust, which is the essenceof your business, takes years to build, yet secondsto shatter.

*Jeff Whitton, CPA is a partner in the firm of Bryars,Kuykendall, Tolleson & Whitton, LLP. He has more thantwenty-five years of experience as a Certified PublicAccountant working on taxes, audits, business valuations andforensic accounting.


Internal Safeguards..

Jeff Whitton

Securities and Exchange Commission receiverships in Ponzicases was the focus of the California Receivers Forum’s LA/OCChapter – sponsored educational program on October 27, 2010in downtown Los Angeles.

More than seventy attorneys and other professionalsattended the sold-out luncheon program, hosted by theBuchalter Nemer firm. Panelists included John M. McCoy III,Regional Trial Counsel in the SEC’s Los Angeles Office, andthree professionals with significant expertise in SECreceiverships – receiver Steve Donell, counsel Kathy BazoianPhelps of Danning Gill Diamond & Kollitz, LLP, andaccounting professional Howard Grobstein, partner-in-charge ofthe Crowe Horwath firm’s Los Angeles office.

The program began with an outline of a typical Ponzischeme and its cast of characters, including: the managementteam and insiders who ran the scheme and looted the illegally-generated assets; the lawyers, accountants, and auditors whosupported the scheme; the brokers who sold the Ponziinvestments to unwitting buyers; and the defrauded investors –some who may have been paid substantial returns from thePonzi scheme’s fictitious profits.

John McCoy discussed why the SEC seeks appointment of areceiver and the red flags that attract the SEC’s attention tosuch fraudulent schemes. He went through the process andpracticalities of obtaining a receiver’s appointment, and offeredinsight into the SEC’s decision-making process regardingappointment of receivers and importance of the receiver’sindependence. Mr. McCoy stressed the critical importance ofthe receiver’s cooperation in preserving evidence related to thecriminal investigation.

Steve Donell, who has served as receiver in several SECcases, discussed what he characterized as the “controlled chaos”experienced in the early weeks after a receiver is appointed in aPonzi scheme case. He offered practical tips on how to secureproperty, records and electronic data, and discussed how toeffectively implement a strategy to ensure a successful securitiesfraud case.

The importance of surprise and speed in taking over thesuspected perpetrator’s property, as well as the coordinationneeded among the receiver’s agents and professionals to lockdown bank accounts, assets and records were among topicsdiscussed. He also addressed the intersection of the civil SECcase and the criminal prosecution that typically already hasbeen or will be filed – requiring document preservation,computer imaging and detailed documentation of the sourceand location of files and data for future use by the criminalauthorities.

Last, Mr. Donell commented on the importance ofmaintaining investor relations, including the importance ofimmediately launching a case information website and ofresponding to the hundreds of calls and inquiries fromdistraught investors.

Kathy Phelps, with wide experience in representingreceivers in SEC cases, discussed the variety of litigation cases areceiver can pursue when the tangible assets are gone or areinsufficient to compensate the defrauded victims and othercreditors. Claims for breach of fiduciary duty, fraud, negligenceand avoidance of fraudulent transfers based on either actualintent to hinder delay and defraud creditors or constructivefraud, were among those discussed.

Educational Program

How the Securities and ExchangeCommission Battles the Progeny of CharlesPonzi – Using Receivers as an Important ToolBY KATHY BAZOIAN PHELPS, ESQ.

Howard Grobstein, Stephen Donell, John McCoy III and Kathy Bazoian Phelps [L-R] comprised the expert panel discussing SEC enforcement actions against Ponzifraud and the integral role of receiver’s in such actions.

More than seventy attorneys and other professionals attended the sold-out luncheonprogram hosted by the Buchalter Nemer firm in Downtown Los Angeles on October27.

• Fall 2010


Fraudulent transfer actions can be used to recover: (1)payments made to investors as a return of their principal orpayment of fictitious profits; (2) commissions paid to salespeople and brokers; (3) gifts made to family and friends; and (4)charitable contributions made by the Ponzi scheme debtor, shesaid.

Ms Phelps also discussed the issues raised by the legaldefenses to these claims, including the confusion over themeaning of “good faith” for investors and brokers when they tryto hold on to the money they have been paid. She alsoexamined the applicability of the in pari delicto doctrine as aresult of the wrongful conduct of the entity in receivership’sinsiders [see Ms Phelps’ extended article on this topic beginningon Page One of this issue of RN – Ed.].

Howard Grobstein, an experienced forensic accountantskilled in providing accounting support for SEC receivers,discussed the process of keeping an inventory of records, how totrace funds and make findings for the receiver, and the taxissues that arise in Ponzi cases. The first key issue for theforensic accountant to handle involves securing both electronicand hard copy data – data to be used to determine whetherfraudulent conduct occurred, to analyze transactions and toprepare tax returns for the receivership estate, he explained.

There are specific methodologies used to trace funds anddetermine whether the receiver has claims against variousparties including insiders, investors and professionals that mayhave been involved in the scheme, Mr. Grobstein said. Heended his discussion with an explanation of the importance andcomplexity of tax issues in receiverships.

Fall 2010 •


Internal Safeguards..

MARK YOUR CALENDARSLos Angeles/Orange County ChapterSSPPRRIINNGG EEDDUUCCAATTIIOONN SSCCHHEEDDUULLEE

Thursday February 24 – Are you Properly Insured? Why Insurance

Matters in the World of Receiverships.Thursday March 24 – Receiver as Sherlock Holmes: When and How

Does a Receiver Track Down Assets?Thursday June 23 – Hospitality: Why Hotels Are Different.

To Register and More Program Information Visit:www.receivers.org/laoc

• Fall 2010

The receiver’s sale is preferable to these secured creditorswhich generally believe that having the court through itsreceiver sell the property deflects potential construction defectliability from the lender, which does not fit the definition of“seller” under California law in such circumstance.

But when the defendant borrower objects to the proposedreceiver’s sale, the court is forced to decide if it has equitableauthority to co-opt the defendant/owner’s property rights andallow its receiver to do such a build-out to “preserve thedeteriorating property” (as the argument goes) and then to sellunits over the defendant/owner’s objection. The court’salternative is to have its receiver fence and guard the propertyuntil the underlying lawsuit is resolved. If that should happenand the collateral deteriorates, the most cost-effective courseof action may be to raze the project and sell the raw land.

Third Parties’ Impact on the SaleBut even if the court authorizes and approves the receiver’s

sale over the objections of a lienholder or borrower, titleinsurance companies may refuse to insure the proposed buyerof the receivership real property in the face of the objectionsto the sale. Title insurance companies do not want to bedragged into litigation should the objector appeal the court’sorder to approve the receiver’s sale.

Consequently, title insurance companies may withholdissuing the insurance policy to the buyer until the 90-dayappeal period has run. In essence, the objection has effectivelyheld up the receiver’s sale until the appeal period has run or anagreement is reached through which the objections arewithdrawn to alleviate the title insurance company’s concernabout an appeal of the sale order.

The delay caused by the objections can result in the salenot closing for the 90-day appeal window, and may have theundesired effect of (1) the sale falls apart altogether wheretime is of the essence to the buyer or parties, (2) the collateralis damaged if there are weather-related issues that must bedealt with immediately to be handled by the proposed buyerand the receivership does not have the funds to effect therepairs, (3) the accrual of increased taxes/penalties/interest,and (4) increased costs for the receivership continuing whilethe sale is pending for another 3 months.

By further example, a receiver’s sale may be disrupted by ataxing authority. It is one thing for the receiver and theparties to be aware of delinquent property taxes owing on thereceivership property which would have to be paid from thesale proceeds; it’s another when a taxing authority seeks toobtain through the receivership several years’ worth of unpaidpartnership taxes owing from the borrower/owner. It becomesmore problematic where the borrower/owner is a singlepurpose entity.

The author is aware of at least one instance where a courtordered that all delinquent partnership taxes of a singlepurpose entity be paid from the proceeds of a receiver’s sale,even though some of the tax years preceded the receiver’sappointment.

1 A receiver appointed by the court upon the petition of a secured creditor to

take possession of, operate and sequester rents from a building pledged as

collateral for a loan. See California Code of Civil Procedure section

564(a)(2), which specifically authorizes such appointment where there is a

lien under a deed of trust, it appears the property is in danger of being “lost,

removed, or materially injured,” or the contractual obligations are not being

performed and the value of the property is probably insufficient to discharge

the debt. There is nothing in this statute that authorizes a receiver’s sale of

receivership property prior to the secured lender foreclosing and taking title to

the real or personal property collateral.

2 The primary purpose of an equitable receivership is to preserve property

pending resolution of disputes between litigants, i.e. appointment is authorized

“[i]n all other cases where necessary to preserve the property or rights of any

party.” C.C.P. §564(b)(9).

* Mia S. Blackler, Esq. is a shareholder in BuchalterNemer, P.C.’s San

Francisco Office. She focuses her practice on commercial, real property and

financial institutions litigation in state and federal court, and has special

expertise in enforcing creditors’ rights, including seeking prejudgment remedies

and receiverships.


Real Property Receiver’s Sales...

LOYOLA IV SPONSORSPLATINUM SPONSORS:

GOLD SPONSORS:

SUPPORT THE SYMPOSIUM!For More Sponsorship Info Visit:

www.receivers.org

Fall 2010 •

As indicated above, subsection (d) only refers to receivershipsand does not mention assignments or other insolvencyproceedings. The 9th Circuit not only relied on the statutorylanguage, but reasoned that in a receivership “the estate is inthe hands of a court appointed and supervised individual actingas an arm of the court. Such is not true of the common lawassignee. No matter how salutary the practice of assignmentsfor creditors, it must be conceded that as an individual engagedin private enterprise, the assignee is for practical purposesoutside the control and supervision of the court.” It also citedCalifornia cases to the same affect including Bank of Visalia v.Dillonwood Lumber Co., 148 Cal. 18 (1905). The assignee inthe case argued that such a rule would be fatal to assignments“since the risk of nonpayment of fees and expenses would beimmeasurably increased if labor claims be held to be entitled toa priority”. The court rejected this assertion as being overstatedbut added “but even if not, we find no sufficient ground forholding otherwise.” See also, Meyer v. Bass, 281 F. 2nd 728,731 (9th Cir. 1960) [“payment of fees and expenses ofadministration in disregard of the liens of the wage claimantswas an improper disbursement by the assignee.” – assigneesurcharged for making distribution].

With regard to federal receiverships, while the statute is notbinding on federal courts (the statute itself confirms it is only“binding upon all courts of this state”) at least one federal courthas indicated it will usually follow it. T. H. Mastin & Co. v.Pickerling Lumber Co., 2 F. Supp 605, 606 (N.D. Cal. 1933) [“itis conceded that federal courts acting in equity receiverships arenot absolutely bound to recognize preferences and prioritiescreated by state laws, but it is the practice of this and otherjurisdictions to allow such preferences and priorities as seemequitable”.]. It is unlikely, however, that the provision wouldbe followed in government enforcement cases where the goal isto return funds to defrauded investors or consumers because,generally, the money recovered in those cases is held in trust forthe defrauded parties. FTC v. Crittenden, 823 F. Supp 699(C.D. Cal. 1993). To the extent there aresufficient funds in the estate to pay suchclaims, then the priority would likely apply.

Peter A. Davidson

Peter A. Davidson is a Partner of Ervin Cohen & JessupLLP a Beverly Hills Law Firm. His practice includesrepresenting Receivers and acting as a Receiver in State andFederal Court.


Ask The Receiver...

RECEIVERSHIP APublicationofthe CaliforniaReceiversForum …receiver 1 seeks court confirmation of a...

Documents

Transcript of RECEIVERSHIP APublicationofthe CaliforniaReceiversForum …receiver 1 seeks court confirmation of a...